Issue No. 154: The liquidator and the flea

Last Word: Macy’s, the liquidator. Macy’s, the flea.

We shopped at department stores because we wanted serendipity, fashion eCommerce is providing a new platform for this consumer behavior. The way that people shop is fundamentally changing and the market is reflecting this in a unique way. For heritage brands who’ve built strategies around physical retail, these shifts can be difficult to work through, once heavily invested.

Nordstrom (JWN) 👇🏾 and Macy’s (M) 👆🏾 are the leaders of a fading family of department stores. Of all of the retail options, these two retailers have best positioned themselves for success in today’s market. Macy’s is doing so by (1) liquidating real estate assets to prepare for eCommerce consolidation (2) sub-letting storefronts to other brands to offset lost revenue by way of decreasing in-store sales (i.e. the ‘flea market strategy.’

The flea market, an icon of shopping in the 1970s where assorted business owners set up shop to hawk their wares. It could have been fancy jewelry or collectible baseball cards, but a trip to the flea market offered an array of choices not found in the typical department store. Sort of sounds like a visit to department store Macy’s (M) circa 2016.

Macy’s said Monday it will start selling merchandise from Brookstone such as kitchen gadgets, audio technology and other paraphernalia at some 347 stores nationwide and its website for the holiday shopping season. The deal with Brookstone comes on the heels of Macy’s opening an Apple (AAPL) shop at its Herald Square flagship store in New York City to sell the latest iPhones, iPads and Apple Watches. Macy’s will also make the Apple Watch available at more than 180 stores nationwide and on its website.

Nordstrom has already begun the cycle that Macy’s is currently embarking upon. Digital everything! eCommerce! DNVB M&A! However, Amazon’s eCommerce adoption is eating into Macy’s longterm stabilization efforts (see this tweet). This pivotal holiday season, Amazon is hiring 20% more temporary workers for the holidays and Nordstrom is hiring 4% fewer. As Amazon increases its stronghold in fashion eCommerce and as consumer behavior continues to shift, the outlook for both of these titans will continue crumble under the pressure of swift market shifts.

Struggling department store Macy’s (M) may have just had its own moment where it sends important clues to investors. The company shared on Monday that it sold five stores to mall developer General Growth Properties (GGP) for $46 million. Macy’s expects to realize a gain of $32 million on the sales in the third quarter.

Macy’s deal with GGP is exciting for their balance sheet but devastating everywhere else. Meanwhile, this is emboldening for a company like Amazon who is looking to finish off department store competitors. Analysts speculate that Amazon will begin purchasing asset groupings like GGP’s recent acquisition. Grocery is Bezos’ focus, right now, but many believe that Amazon will be mall anchor in the next few years. This would theoretically accomplish two things: (1) intensification of pressure on fashion retail incumbents and (2) the addition of accessible 25,000-30,000 sq ft hubs to serve as physical retail and warehousing. Of course, this could accelerate the continued proliferation of Amazon Prime / Prime Now.